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18 May, 08:16

Consider an indifference curve for someone deciding how to allocate time between work (and thus consumption) and leisure. Suppose the wage increases. The substitution effect induces a person to work and consume in response to higher wages. If consumption is a normal good, the income effect induces the person to consume when the wage rises, but if consumption is an inferior good, the income effect induces the person to consume in response to higher wages. True or False: It is possible that the person's consumption falls as a result of the higher wage. True False

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  1. 18 May, 10:38
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    Answer: True if Consumption is of Inferior Good

    Explanation:

    Inferior goods are inversely related to wages. They are consumed because wages are less and people do not have the capacity to buy what they really want which are normal goods. If wages rise, people will leave Inferior goods for normal goods which is to reduce consumption of normal goods.

    Examples of inferior goods are off brand cereals. Notice how as wages increase they are bought less of and instead their more popular counterparts are purchased.
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